Hostess Brands, Inc. (NASDAQ:TWNK) shares are down more than -2.77% this year and recently increased 1.04% or $0.13 to settle at $12.64. Omega Protein Corporation (NYSE:OME), on the other hand, is down -12.57% year to date as of 11/13/2017. It currently trades at $21.90 and has returned 0.00% during the past week.
Hostess Brands, Inc. (NASDAQ:TWNK) and Omega Protein Corporation (NYSE:OME) are the two most active stocks in the Processed & Packaged Goods industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect TWNK to grow earnings at a 7.66% annual rate over the next 5 years. Comparatively, OME is expected to grow at a 8.00% annual rate. All else equal, OME’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 16.2% for Omega Protein Corporation (OME). TWNK’s ROI is 6.40% while OME has a ROI of 10.50%. The interpretation is that OME’s business generates a higher return on investment than TWNK’s.
Cash is king when it comes to investing. TWNK’s free cash flow (“FCF”) per share for the trailing twelve months was +0.40. Comparatively, OME’s free cash flow per share was +0.53. On a percent-of-sales basis, TWNK’s free cash flow was 0.01% while OME converted 0% of its revenues into cash flow. This means that, for a given level of sales, TWNK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. TWNK has a current ratio of 2.20 compared to 3.80 for OME. This means that OME can more easily cover its most immediate liabilities over the next twelve months. TWNK’s debt-to-equity ratio is 1.05 versus a D/E of 0.00 for OME. TWNK is therefore the more solvent of the two companies, and has lower financial risk.
TWNK trades at a forward P/E of 18.84, a P/B of 1.32, and a P/S of 1.63, compared to a forward P/E of 16.22, a P/B of 1.39, and a P/S of 1.43 for OME. TWNK is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. TWNK is currently priced at a -19.49% to its one-year price target of 15.70. Comparatively, OME is -0.45% relative to its price target of 22.00. This suggests that TWNK is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for TWNK and 3.00 for OME, which implies that analysts are more bullish on the outlook for OME.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. TWNK has a short ratio of 9.00 compared to a short interest of 1.16 for OME. This implies that the market is currently less bearish on the outlook for OME.
Omega Protein Corporation (NYSE:OME) beats Hostess Brands, Inc. (NASDAQ:TWNK) on a total of 9 of the 14 factors compared between the two stocks. OME has a higher cash conversion rate, is more profitable, generates a higher return on investment, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, OME is the cheaper of the two stocks on an earnings and sales basis, Finally, OME has better sentiment signals based on short interest.